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Impact of COVID-19
on the hospitality
industry and its
effect on audit 28
Deloitte | A Middle East Point of View - Fall 2020 | COVID-19 and hospitality
29
Deloitte | A Middle East Point of View - Fall 2020 | COVID-19 and hospitality
30
he global spread of COVID-19
caused multiple countries to
impose a complete lockdown,
isolation periods and closure of all non-
essential businesses, thereby creating a
storm exposing businesses and
economies to various challenges. From
remote working arrangements, laying off
employees and disruption in operations,
the pandemic has forced businesses
around the globe to step back and
revamp their strategies to adjust to the
new normal. Businesses that were able to
treat this threat as an opportunity
succeeded while others, unable to adapt,
fell short. The impact of this pandemic
varies by segment. Businesses heavily
reliant on travel and human interaction
are the hardest hit, while the
indispensable segments (for example,
pharmacy, food retail, essential services)
remained resilient. This report focuses on
the COVID-19 impact on the hospitality
industry and its effect on audit
procedures to ensure fair presentation of
financial statements.
The hospitality industry during the
pandemic: An overview
Exponential reduction in personal and
business travel has imposed significant
pressure on the hospitality industry
resulting in lower occupancy and revenue
per available room.
The near-complete lockdown imposed to
battle the pandemic led to a 98 percent
decline in international tourists globally in
May 2020 compared to 2019.1 A 56
percent year-on-year drop in tourist
arrivals globally between January and
May was also noted. This translates into a
fall of 300 million tourists and US$320 bn
lost in international tourism receipts,
more than thrice the loss during the
global economic crisis of 2009. Industry
stakeholders face significant hurdles:
oversupply, decreasing room rates,
negative consumer sentiment,
restrictions on travel and postponement
of major global events leading to severe
operational and liquidity issues. The hotel
owners have thus been forced to curtail
costs by implementing measures such as
reduced employees and/or salaries,
forced leave, leave without pay and full or
partial closure of hotels.
According to market data agency Smith
Travel Research, occupancy rates in the
Middle East were relatively healthy in
January at 73.3 percent with an average
daily rate (ADR) of US$149. However,
imposed travel restrictions and
lockdowns shrunk average occupancy in
June to 47.3 percent and ADR to US$121,
a year-on-year decline of 28 percent and
17 percent, respectively.
The impact of thispandemic varies bysegment. Businessesheavily reliant on traveland human interactionare the hardest hit, whilethe indispensablesegments (for example,pharmacy, food retail,essential services)remained resilient.
T
Deloitte | A Middle East Point of View - Fall 2020 | COVID-19 and hospitality
Middle East occupancy analysis
120%
20%
70%
January
2020 occupancy
February March June
2019 occupancy
31
The above snapshot of the average
occupancy and average daily rates in
different markets within the region in
June 2020 depicts the significant impact
the pandemic has had on the industry.
Road to recovery
Increasing concern as to the implications
on the travel and tourism sector, coupled
with a challenging economic outlook for
the GCC region will have a major impact
on the recovery of this industry, which is
largely dependent on a number of factors
such as:
• Recovery of oil and gas prices;
• Efforts of governments to monitor and
contain the spread of COVID-19 to
support and facilitate major events such
as Expo 2020 and FIFA World Cup 2022;
• Availability of a vaccine;
• Uplift of regional and international
travel ban to and from key source
markets; and
• Improvement of traveler and guest
confidence.
Increasing concern as tothe implications on thetravel and tourismsector, coupled with achallenging economicoutlook for the GCCregion will have a majorimpact on the recovery of this industry.
Deloitte | A Middle East Point of View - Fall 2020 | COVID-19 and hospitality
Middle East ADR analysis
160
150
140
130
120
110
100
January
2020 ADR
February March June
2019 ADR
GCC markets occupancy, ADRJune 2020, US$
180$
160$
140$
120$
100$
80$
60$
40$
20$
0$Abu Dhabi Al Khobar
& DammamQatar Riyadh Jeddah Dubai Medina Makkah Manama Amman Kuwait
CityMuscat Cairo
ADR
Source: STR/2020 © CoStar Realty Information, Inc.
Occupancy
60%56%
48%
43%
34%
28%
19% 17% 17% 16% 16% 14%
9%
32
For the short term, many beach hotels
and resorts have offered ‘’staycation’’/
“daycation” deals and discounts to entice
foot traffic. As hotels reopen, aggressive
room rates to achieve high occupancy
coupled with an increased supply of
hotels in the region could negatively
impact profitability and diminish owners’
returns given that the purchasing power
of tourists is likely to remain bleak. For
hotels, hygiene and safety are critical
factors in generating future demand. This
will likely increase health and safety
spend; however, hoteliers cannot
compromise on these costs for
sustaining their business. These factors
are a key consideration whilst budgeting
and forecasting going forward.
Audit implications
For hoteliers and hotel investors, COVID-
19 has rushed through the industry like a
flood. As the virus subsides, it will reveal a
transformed hospitality landscape with a
need to adjust operations. Accordingly,
audit procedures would need to be
tailored to deal with this impact. Key
considerations at different stages of the
audit are summarized below:
Planning
As part of the planning and risk
assessment procedures, the audit team
will need to obtain an understanding of
the entity through management inquiries,
analytical procedures, observation and
inspection. Impact on changes to key
supplier arrangements, termination of
management agreements with operators,
lease concessions obtained or given,
changes to existing financing facilities and
changes to legal and regulatory
environment will need evaluation. The
audit team would need to ensure
professional skepticism due to increased
possibility of fraud because of financial or
emotional pressure, an opportunity that
could arise due to a breakdown in
monitoring controls and rationalization.
While it is always important to have early
discussions with management to
determine if controls are changing or
there is an expectation that the controls
we are planning to test is changing, it is
very critical to do so now as there could
be changes to the ways of working.
The audit team would need to be mindful
of the increase in risk of default from
travel agents and corporates leading to
bad debts, impairment of long-lived
assets due to significant reduction in the
expected future cash flows and the ability
of the hotels to continue as a going
concern.
Internal controls
While testing internal controls, the audit
team should place special emphasis on
any changes in the performance of the
controls especially during the pandemic.
Further, due to shortage of staff, there
could be a breakdown of controls such as
daily revenue reconciliations, verification
of rate variance report, housekeeping,
review of void checks and rebates
provided, payment processing and
month-end reporting due to the inability
of individuals to perform control duties.
With regards to controls over estimates,
the audit team would need to consider
the failure on the part of management to
consider the impact of new uncertainties
and market volatility on accounting
For hoteliers and hotel investors,COVID-19 has rushed through theindustry like a flood. As the virussubsides, it will reveal a transformedhospitality landscape with a need toadjust operations.
Deloitte | A Middle East Point of View - Fall 2020 | COVID-19 and hospitality
33
estimates and judgements. Additional
consideration should also be given to the
impact on segregation of duties,
automated controls and the effectiveness
of the systems to adapt to employees
working remotely.
Furthermore, if the audit team is relying
on operating effectiveness of controls
tested in prior years that address risks
other than significant risks under a
rotation plan approach, they need to
understand whether there have now
been significant changes to that control
as it is no longer appropriate to rely on
audit evidence about the operating
effectiveness of the control obtained in
previous audits.
We can view this as an opportunity to
provide management with insights on
their control environment that they will
value as they go through this difficult
period. They can ensure that their audit
approach aids and challenges entities
react appropriately and build resilient
control environments to form a
foundation to their ongoing operations.
Group audits
To satisfy the requirements of ISA
600–Group Audits with regards to
directing and supervising of component
auditors, consideration should be given
to whether the group engagement team
can carry out their responsibilities
virtually through video conferencing
instead of on site visits and reviews.
Execution
The audit team would need to plan
additional procedures to evaluate
significant assumptions made by
management, particularly estimates
based on forward-looking forecasts. For
example, future cash flows and discount
rates used in the impairment model or
judgements used in the expected credit
loss model to assess the loss allowance
on trade receivables. Further, with
regards to substantive analytical
procedures, when the derived
expectation is based on the assumption
that account balances are consistent with
historical performance, the expectation
may no longer be valid and a different
type of substantive procedure may need
to be performed.
Physical counts might need to be done
remotely with adequate safeguards to
ensure appropriateness of the count.
Lastly, the audit evidence obtained
should be critically evaluated i.e. changes
in the nature of evidence received may
result in additional consideration as to its
reliability.
Reporting
Assessment of going concern:
Audit teams need to assess the going
concern and whether these
circumstances will result in prolonged
operational disruption that will, in turn,
erode the financial position of the hotel,
thus leading to issues relating to liquidity,
and indicating that the hotel is unable to
meet its obligations in the foreseeable
future. Adequate disclosures related to
going concern should be provided in the
financial statements.
Audit opinion
Implications on the auditor’s report to be
considered may include:
• For public interest entities, requirement
of a Key Audit Matter related to
additional audit work owing to the
pandemic;
• A material uncertainty in relation to a
going concern;
• A qualification, or adverse opinion, in
respect of inadequate disclosures, or
going concern uncertainties, in the
financial statements;
• A qualified opinion or a disclaimer of
opinion because of scope limitation
when unable to obtain sufficient
appropriate audit evidence. For
instance, when physical inventory count
could not be attended to in person.
Conclusion
Auditors may reckon that the current
circumstances may bring about an
opportunity to do things differently, by
using new, or flexing the use of existing
technology. There could continue to be
restrictions on travel to client premises
and audits might need to be performed
remotely. The audit profession was
already on a path of digital
transformation and this investment has
allowed many firms to adapt to the new
circumstances relatively more quickly
than other industries. Greater use of
analytics can be implemented to enable
remote auditing and redeployment of
staff to areas of business requiring extra
resources thereby ensuring an efficient
and effective audit with value added
insights to the client.
by Jude Rodrigues, Partner and Krishna
Kumar, Senior Manager, Audit &
Assurance, Deloitte Middle East
Endnotes
1. Impact Of COVID-19 on Global Tourism Made
Clear as UNWTO Counts the Cost of Standstill
published by UN World Tourism Organization
on 28 July 2020.
Deloitte | A Middle East Point of View - Fall 2020 | COVID-19 and hospitality
Auditors may reckon that the currentcircumstances may bringabout an opportunity todo things differently, byusing new, or flexing theuse of existingtechnology.
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